Reducing Operating Costs
It doesn't matter what your billings are. The only thing that matters is how much you keep.
Every dollar saved in overhead is a dollar on the bottom line of net profit — and a dollar less borrowed. The object of reducing costs in your consulting services business is to increase profits. Increasing profits through cost reduction must be based on the concept of an organized, planned program. Unless adequate records are maintained through an efficient and accurate accounting system, there can be no basis for analyzing costs.
Cost Reduction
Cost reduction is not simply attempting to slash any and all expenses without order. The owner-manager must understand the nature of expenses and how expenses interrelate with sales, overhead, gross profits, and net profits. Nor does cost reduction mean only the reduction of specific expenses. You can achieve greater profits through more efficient use of your expense dollar. Some of the ways you do this are by increasing the average sale per client, by getting a larger return for your promotion and sales dollar, and by improving your internal methods and procedures.
As an example, one telecommunications consultant was quite pleased when, in a single year, sales went from $60,000 to $200,000. However, at the end of the year, records showed that net profit the prior year, with lower sales, was actually higher. Why? Because the expenses of doing business grew at a rate faster than the income.
Your goal should be to pay the right price for prosperity. Determining that price for your operation goes beyond knowing what your expenses are. Reducing expenses to increase profit requires that you get the most efficient use of your expense dollars.
Employee Savings
Checking job records, you might determine that one of your employees is significantly less efficient than other employees performing the same tasks. You can then reduce expenses by increasing this employee's efficiency through training. By watching this employee perform his job, you can determine where the inefficiencies are and help him overcome them. If you do this with consideration for your employee, he will appreciate your attention, and so will your profit line.
Necessary Expenses
Sometimes you cannot cut an expense item. But you can get more from it and thus increase your profits. In analyzing your expenses, you should use percentages rather than actual dollar amounts. For example, if you increase sales and keep the dollar amount of an expense the same, you have decreased that expense as a percentage of income. When you decrease your cost percentage, you increase your percentage of profit.
Business management means managing any components that have an impact on profitability. That's just about everything. You will track and manage costs, income, assets and liabilities, and employees. The better you do at managing these components, the more profitable your consulting service will be.
On the other hand, if your sales volume remains the same, you can increase the percentage of profit by reducing a specific item of expense. Your goal, of course, is to simultaneously decrease specific expenses and increase their productive worth.
Before you can determine whether cutting expenses will increase profits, you need information about your operation. This information can be obtained only if you adequately use record-keeping and financial management systems, as covered in Chapter 10.
